Perhaps you were surprised to find that you would be receiving a gift from Uncle Sam in the form of a hefty tax return. Or maybe you planned it this way all along. So how do you spend your tax return now that you have it?
If you’re like most Americans, your first instinct is to take a trip to Vegas, or perhaps you’re local mall. Either way, both options are a gamble that are sure to result in a quick loss of funds with virtually very little to show for it.
If you’ve started your journey to financial freedom, a lump sum of money like a tax return can easily help boost your progress in paying down debt, saving for an emergency and creating a solid financial plan.
According to the Internal Revenue Service, the majority of Americans qualify for a tax return, with the average return resulting in a sum of $2,913. Almost $3,000 is a nice chunk of change, if you ask me. So what’s the right way to spend your tax return?
Fill Your Emergency Fund
If you’ve been working on paying off your debt but have yet to fully stock your $1,000 emergency fund, your tax return is an excellent way to finally cross that off your list. An emergency fund is not a “I spent too much money on ice cream and take out this month, so let me dip into this account” fund. It’s a plain old emergency fund, in case you find that your car broke down, or come into an unexpected vet bill. Your emergency fund should only be touched in dire emergencies, such as not being able to pay your rent. It’s not a shopping fund.
If you’re too tempted by a lump sum of money sitting in your checking account, move your emergency fund to a different bank from your everyday bank, which will limit the temptation to spend it. Online banks generally offer a bit higher interest than traditional brick and mortar banks, and it also takes about two to three days to transfer funds–limiting temptation and easy access to funds.
Pay Down Debt
After you’ve filled your $1,000 emergency fund, that still leaves you with $2,000. The rest can be used to pay off any outstanding debt. If you have several accounts that need to be paid off, it might be more motivating to wipe out all the smaller accounts first. Or perhaps you prefer to make a dent on the largest debt, and also the most looming. Whatever works for you, it will be a great motivating factor to continue on the path of financial freedom by paying off a large chunk of debt all at once.
Have a Little Fun
No matter your financial situation, it’s always important to have a proper balance, and that includes having fun with money that you work hard to earn. If you’re financial situation is still pretty dire, then perhaps only take a small percentage, like 2% from your tax return, and spend it guilt free. If you’re doing a little bit better financially, you can probably afford to take a larger chunk for fun activities.
Other Ideas on How to Spend Your Tax Return
If you’ve already filled your emergency fund, paid down all your debt, and have a six-month emergency fund, then you can contribute your tax return to one of your goals, like a home down payment fund, a vacation, or maxing out your retirement accounts. Whatever the case, it’s always good to take care of financially responsibility first, but always making sure you also allow yourself to have a little fun.